(Bloomberg Gadfly) — The U.S. health care system is full of things that don't make much sense. A lot of them are extremely profitable.
One of these, recently highlighted by legendary short-seller Jim Chanos, is dialysis, a market largely split in the U.S. between two large firms, DaVita Inc. and Fresenius Medical Care AG & Co KGaA. If the Senate passes a health care bill similar to one the House of Representatives passed last month, then it may become easier for private insurance plans to stop covering dialysis, cutting off a big source of profit for these companies.
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This is just one of the more extreme risks, of many, looming over health care companies these days. And yet shares of the two biggest dialysis firms have outpaced the broader stock market since the election, and the rest of health care is keeping up.
Dialysis is a costly procedure that is mostly paid for by government programs — people with end-stage kidney disease become eligible for Medicare, regardless of age. Trouble is, those programs reimburse dialysis companies at a significantly lower rate than private insurers. According to a Bloomberg Intelligence analysis, DaVita made 95% of its Ebitda from patients with private insurance from 2013 to 2016. The profit margin for these patients is 77%, versus 2% for government patients.
Though eligible for Medicare, some dialysis patients prefer private insurance because it can be more flexible. The Affordable Care Act made that insurance easier to get. It requires insurers to cover such patients, says insurers can't charge those patients more, caps out-of-pocket expenses and helps less-wealthy patients cover premiums.
The Republican effort to change the ACA, the American Health Care Act, seems designed to be a pain for dialysis firms. The law may let states apply for waivers of the regulations that have made private insurance more attainable. If given the opportunity, insurers would likely make plans covering dialysis patients prohibitively expensive, to help keep such people out of their risk pool.
Dialysis companies have already been curtailed in their ability to nudge patients toward commercial insurance by funding third-party charities that help pay for it. The AHCA has the potential to enhance their woes by pricing patients out of the private insurance market, charity or no.
Not every part of the health care sector is quite as exposed to the AHCA as dialysis is. But most companies have similar risks, for which stock prices have failed to fully account.
